Regulation

An SEC Rule on Global Pay Could Embarrass Companies

Every year an insurer called Protective Life (PL) crunches the numbers for its shareholders to show the cost of pensions promised to executives and derivative instruments used to hedge risk. The calculations are pretty complex. Yet when it comes to figuring out how the total compensation of its chief executive officer compares with the median pay of its employees, Protective wants to take a pass.

The Birmingham (Ala.) insurer is one of 18 businesses and industry groups urging the Securities and Exchange Commission to dial back a requirement to publish such a pay ratio under the new Dodd-Frank financial reform law. The rule requires U.S. publicly traded companies to determine what they pay each employee globally in salary, bonus, and benefits and then find the one whose pay falls at the exact midpoint to compare with the CEO's compensation. By disclosing this ratio, advocates say, compensation would be more transparent and accountable to investors and employees.

Others see a logistical nightmare. "It's difficult to overemphasize how burdensome this requirement could be for large employers," Alfred F. Delchamps, a senior associate counsel at Protective Life, said in an Oct. 1, 2010, letter to the SEC. For example, he wrote, it may be hard to get pension-benefits data from third-party administrators. It would cost "easily in the millions" for the biggest companies to compile the data, says Timothy J. Bartl, senior vice-president and general counsel of the Washington-based Center on Executive Compensation, an industry group. "It sounds like it would be something available at the push of a button. It isn't."

Companies are overstating the difficulties to avoid inflaming activists who think corporate pay is out of control, says Barbara Roper, director of investor protection for the Consumer Federation of America. Assaults on pay disparity are as old as capitalism. Management theorist Peter Drucker, who died in 2005, began arguing in the 1970s that the ratio should not exceed 25 to 1. Set against the average U.S. worker, CEO pay hit 263 to 1 in 2009, according to the Institute for Policy Studies, a Washington think tank critical of high executive pay. Median pay comparisons could make the ratio even higher. Roper says companies "do calculations more complex than this every day" and some companies with large numbers of foreign employees are trying to get their pay exempted "because they don't want to include their sweatshop workers in the ratio." She did not identify any companies.

The ratio requirement was included at the behest of Senator Robert Menendez (D-N.J.) during debate on the Dodd-Frank legislation. Representative Barney Frank (D-Mass.), the law's co-author, says he is considering how to lessen the rule's burden, even if that means changing the law. Representative Nan Hayworth (R-N.Y.) wants to erase it from Dodd-Frank completely.

Darla Stuckey, senior vice-president for policy and advocacy at the Society of Corporate Secretaries & Governance Professionals, told House lawmakers in September she assumed Congress didn't intend for companies to tally their foreign workers' pay. Not so, says Menendez. "When I wrote 'all' employees of the issuer, I really did mean all employees," Menendez told the SEC in a Jan. 19 letter.

The bottom line: Companies hope to head off an SEC rule that could require embarrassing disclosures comparing CEO and median workers' pay.